However, France and Germany both announced fresh lockdown measures last week and the European Central Bank (ECB) strongly hinted that it will ease monetary policy further in December, complicating the outlook for the common currency.
“On the one hand, a ‘blue wave’ scenario in the U.S. election and vaccine conﬁrmation (expected in November) would likely boost all cyclical assets, including the euro,” Goldman Sachs Co-Head of Global FX, Rates and EM Strategy Zach Pandl said in a note Monday.
“On the other hand, near-term euro area GDP (gross domestic product) growth could badly underperform other regions, and we would expect markets to partly price in a deposit rate cut, even if the Governing Council ultimately ‘recalibrates’ other instruments.”
Goldman has therefore removed the euro from the basket of G-10 currencies it backs to outperform against the dollar, leaving in place long positions in the Canadian and Aussie dollars. Short trades in currencies involve borrowing a currency and selling it at the current market rate, with a view to buying it back at a lower price, in essence betting that the currency will depreciate.
“We think investors would look through a temporary pullback in activity if a safe and effective vaccine were conﬁrmed — because we could have a high degree of conﬁdence that activity would rebound soon.”
Pandl also recommended holding the Chinese yuan until the election results become clear, suggesting that the currency’s recent strength has come in part due to markets increasingly pricing in a Joe Biden victory.
Goldman analysts believe this trade can continue to run, and expect USD/CNY to reach 6.50-6.60, before advising investors to step back and reassess the outlook.